AIMA

The Alternative Investment Management Association

Alternative Investment Management Association Representing the global hedge fund industry

Green Light to the Management of Foreign-Domiciled Funds

Philip Price and Mireille Chauvet

SRM Global Fund and Associated Legal and Fiscal Advisors respectively

Q4 2008

The Principality of Monaco is not just a magnet for large yachts, millionaires and Formula One fans. In order to attract funds and alternative asset managers, recent legislative developments have resulted in fundamental changes to the rules governing the management of foreign-domiciled funds from the Principality.

Background

Prior to September 2007, Monegasque law did not permit foreign-domiciled funds to be managed from Monaco. The only exception permitted under Law n°1194 was a relatively circuitous structure whereby foreign-domiciled funds could be managed from their jurisdiction of incorporation. The fund manager could delegate specific functions to a Monaco entity (namely the reception and transmission of buy/sell orders for securities or forward financial instruments). However, while this structure permitted fund entities to be based “on the ground” in Monaco, it did not technically permit management of foreign-domiciled funds to be undertaken in the name of the Monaco entity from the Principality.

Monaco recognised that in order to promote the Principality as a viable centre for alternative asset management, further legislative changes were required. Their response was promulgated last year with Law n°1.338 of 7 September 2007 relating to financial activities (Law n°1.338) and Sovereign Order n°1.284 of 10 September 2007 (Order 1.284).

Scope of Law n°1.338

Law n°1.338 is designed to regulate the constitution, activity and control of financial companies. It applies to the following activities carried out on a usual or professional basis:

• The management, on behalf of third parties, of a portfolio of securities or forward financial instruments.
• The management of mutual funds or other collective investment schemes incorporated under Monegasque law.
• The receipt and transmission on financial markets of orders relating to securities or forward financial instruments, on behalf of third parties.
• The provision of advice or assistance in the areas in relation to 1, 2 and 3.
• The execution of orders on behalf of third parties.
• The management of collective investment vehicles incorporated under a foreign law.
• Proprietary dealing.

Law n°1.338 requires that the regulated activities listed above be undertaken, after authorisation from the Supervisory Commission, by one of the following legal vehicles:

• Sociétés anonymes monégasques (limited liability companies).
• A bank whose registered office is located outside Monaco and which has a branch in the Principality.

Law n°1.338 requires financial companies to be authorised by the Supervisory Commission. To obtain the authorisation, companies seeking to undertake financial activities in Monaco have to be able to demonstrate that (i) their shareholders are able to contribute the appropriate capital (ii) that the managers have the requisite skill and experience and (iii) that the company has premises and sufficient staff to permit the activities detailed in the authorisation. In addition, any authorised company has to become a member of the “Association Monégasque des Activités Financières” (the Monegasque professional association for companies that undertake financial activities).

The minimum share capital of authorised companies depends on the regulated activities that are undertaken but can range from €150,000 for companies managing funds incorporated under Monegasque law to €450,000 for companies managing funds incorporated under a foreign law.

Activities under Law n°1.338 are required to be documented under a written agreement between the Fund and the manager. With minor exceptions, the delegation of a manager’s activities to a third party is prohibited. Law n°1.338 requires that the Supervisory Commission receives and approves all marketing documents to be published or distributed and that various obligations in relation to marketing within Monaco are observed.

Setting up a Société Anonyme Monégasque (SAM)

While a SAM is one of several possible forms of conducting a business in Monaco, portfolio management of foreign funds can only be undertaken by a branch of a bank or a SAM. The objects or purpose clause of the SAM is drawn relatively tightly and activities are required to be specific. The minimum issued share capital of €450,000 must be paid up as at the date of formation but may be used as working capital thereafter. There must be at least two shareholders who need not be Monaco based and corporate shareholders are permitted. A minimum of two directors and two individuals responsible for the strategic orientation and operation of the business (four eyes) who can be the same individuals, but only the latter are required to be Monaco residents. The SAM must have its own premises and must be adequately staffed.

A SAM needs to be authorised as a legal entity once the Law n°1.338 regulatory licence has been obtained. An application involving the intervention of a local notary (notaire) will have to have been filed under the terms of Law n°1.144 of 26 July 1991 and Sovereign Order of 5 March 1895, as amended, with the Direction de l’Expansion Economique, to obtain a license to incorporate the company. Such an application would normally be filed at the same time as the regulatory licence to avoid delays. Obtaining the regulatory licence normally leads to the Law n°1.144 authorisation being granted.

Scope of Order n°1.284

Order n°1.284 states that in addition to establishing the requisite process and control environment and adequate funding at all times, fund management companies are required to prove the receipt and transmission date of each order and must obtain best execution where possible. It also provides that information be disclosed with respect to the fund itself, the custodian and the investors. Rules of good conduct are provided for which include the requirement for the management company to exercise its voting rights in the exclusive interests of the investors and to report such exercise of voting rights to investors accordingly.

Regulatory Framework

Financial companies governed by Law 1.338 are not subject to the control of the Banque de France but are authorised by and under the control of the Supervisory Commission (Commission de Contrôle des Activités Financières).

The Supervisory Commission is independent and its role includes:

• Approval of authorisation requests and granting the authorisations within six months from the date of receipt of a complete authorisation application.
• Ensuring regulatory compliance of the business carried out by authorised companies.
• Supervision of authorised companies.
• Imposing administrative sanctions.

The Supervisory Commission may:

• Obtain all documents distributed by the authorised company (including but not limited to contracts and board minutes).
• Collect information from a third party which has undertaken transactions on behalf of authorised companies.
• Interview and audit directors and representatives of authorised companies and any other individual or corporate body which may provide useful information.
• Visit any office or work place of authorised companies.

Authorised companies are required to communicate to the Supervisory Commission, within six months after the closing of the accounting year, an annual report and a balance sheet prepared in accordance with Monaco regulations. The annual report is required to be certified by the statutory auditors (Commissaires aux comptes) of the company. The certification contains inter alia:

• A detailed analysis of results and explanatory factors.
• A description and an evaluation of the measures which were put in place to respect ethical rules of good conduct and prudential rules (règles prudentielles).

Prudential rules include security measures, internal controls and avoidance of conflicts of interests. Good conduct rules include acting with loyalty and equity in the best interests of clients and in preserving the integrity of financial markets.

Furthermore, the annual report should detail any changes that have taken place during the year in relation to:

• The company’s activities.
• Personnel or technical support.
• The delegations or sub-delegations of management.
• The directors.
• The company’s shareholdings.

Taxation

The only direct tax in Monaco is on business profits. There is no personal income tax, except for French nationals. With regard to VAT, it is payable at the same rate as in France, currently 19.6 percent. French customs legislation applies to the Principality and it is therefore part of the European customs territory but is a non party State of the European Union.

Conclusion

By virtue of Law 1.338 and Order 1.284 the Principality of Monaco has now established a clear and cogent legal and regulatory framework for fund management. Coupled with the Principality’s attractive quality of life and the low personal tax regime, it is anticipated that the new laws will permit Monaco to actively compete with other financial centres to attract managers of foreign-domiciled funds.

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